Question

Assessment item 3

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Case B - Report

Value: 20%

Due Date: 16-Sep-2018

Return Date: 05-Oct-2018

Length: 3000 words

Submission method options: Alternativesubmission method

Task

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Background
You are a manager in the audit division at Miller Yates Howarth(MYH), an accounting firm with offices throughout the majorregional centres of NSW and Queensland. Although a medium sizedfirm by national standards, MYH is the second largest regionalaccounting firm in Australia. Most of MYH’s audit clients are inthe agriculture, mining, manufacturing and property industries. Allthose industries are currently under pressure, either from adownturn in commodity prices or fierce competition from overseascompetitors. Ratios extracted from an unaudited set of financialreports at 30 June 2018 together with audited comparatives for theyear ended 30 June 2017 and 2016 are set out below for yourreview.

You are gatheringinformation to prepare the audit plan of Trunkey Creek WinesLimited for the year ended 30 June 2018. Trunkey Creek Wines (TCW)is one of MYH’s most significant and longstanding clients. Thefollowing information has been gathered to date.

Principal activitiesof TCW
• growing grapes for wine production;
• production and distribution of red, white and sparklingwines;
• beef cattle production on land surplus to grape production;and
• investment of surplus funds.

TCW was originally afamily company incorporated in 1968 and has operated successfullyand profitably since that date. In the 1990’s shares were sold to asmall number of investors to increase funds for the development andupgrading of the winery and the purchase of additional land for thevineyards. Insufficient rainfall had meant that some land was nolonger suitable for wine grape production, as a result, TWC movedinto Wagyu beef cattle production on this surplus land. The Wagyuoperation is now starting to return a profit.

TWC now find that the2 degrees increase in temperature at some vineyards is affectingthe production of sparkling wine and are now looking at purchasingland in cooler climates. TWC has built up a strong following fortheir sparkling wine which earns significant profits in bothdomestic and overseas markets. TWC are currently negotiating theland purchase and part funding in part from medium term bank loans.The remaining purchase price will be sourced from surplusfunds.

The Wagyu beef is soldthrough the Wagyu Selling Group (WSG) in which TWC has shares.These shares form a material part of TWC’s investment portfolio.WSG buys, butchers and sells the Wagyu beef to high end domesticrestaurants and regularly sends frozen shipments to Japan andChina. TWC are heavily marketing their pinot, both domestically andoverseas, as a perfect accompaniment to the Wagyu beef.

The directors of TCWare:

Mrs Claire Harewood, Chairman. Mrs Harewood has significantexperience in the industry and replaced her husband as chair whenhe died 10 years ago.

Mr Phillip Strange, Chief Executive Officer

Mr. Joe Quade

Mr Steven Harewood, son of Claire Harewood and has oversight ofthe Wagyu beef operation

Dr Mary Owens

Ms Hilary Jones

Mr Geoffrey Owens

Your audit partner,John Richards, has approached you and advised that there areseveral areas he is concerned about and he wants to you to reportback to him about these areas before you complete your auditprogram. These areas and accounts are:
• Accounts receivable
• Investments
• Property assets
• Marketing expense

Ratio	2018 (Unaudited)	2017 (Audited)	2016 (Audited)
Return on equity %	10.80	17.5	15.2
Return on beef production assets %	1.67	-0.82	-3.45
Return on grape and wine production assets %	12.2	14.5	16.2
Gross margin %	24.5	30.00	31.76
Net profit margin %	14.38	20.27	17.85
Marketing expense % of total S & A expenses	23.67	17.89	15.2
Times interest earned	6.67	7.51	8.10
Days in inventory - wine	367	423	460
Days in accounts receivable - wine	50.2	60.65	53.24
Days in accounts receivable - beef	57	36	24
Current ratio:1	2.80	2.54	2.66
Quick asset ratio:1	1.18	1.15	1.20
Debt to equity ratio:1	0.54	0.63	0.67

Internal control

The financialcontroller at TCW has been refining the system of internal controlsand informs you, at the planning stage of the current year's audit,that he has put together an internal control manual for thecompany. He has stated that this manual will create greaterawareness of controls in the company, particularly with managementwhich, in the past, has not been overly conscious of the need toimplement and enforce effective internal controls.

Management staffreceive bonuses based on certain agreed-upon target ratios whichinclude measures such as targeted monthly sales volumes, varianceof actual to budget departmental overheads and profit beforeinterest and tax. The Board takes an active interest in theperformance of the company and is quick to request explanations onvariances from the agreed-upon monthly budgets.

Two years ago, thecompany devoted significant time and resources to the developmentand implementation of a new IT system. All teething problemsassociated with the implementation phase have now been resolved,and the financial controller is satisfied that the automatedcontrols in place are assisting in producing accurate and completeaccounting records. The management accountant also looks after theIT function as the position is not regarded by management as beinga full-time job. Once application programs have been tested, strictpassword control exists over access to the programs. Passwords arenot required for access to databases.

To assist in theplanning for the current year's audit engagement, you extracted thefollowing information from a review of the systems notes in thepermanent file and a perusal of the new internal controlmanual:

There are three section managers, one each for grape production,wine production and beef production. Each can order supplies fortheir respective operations up to a limit of $10,000 for eachorder. Orders between $10,000 and $30,000 must be approved by themanagement accountant. Orders over $30,000 must be approved by theCEO. Orders over $50,000 must be approved by the Board.

Orders must be made through the computer ordering system whichhas direct links to the approved suppliers.

Supplier information is contained in a supplier master file.Each supplier has a unique supplier code. If a section managerorders from an unapproved supplier, the order is rejected and sentto the management accountant for approval.

The supplier information file is maintained by the accountsclerk. Changes to the file are approved manually by the managementaccountant.

When supplies are received at the winery, the storeman checksthe supplies received to the online copy of the order and thedelivery docket provided by the supplier. Any discrepancies arenoted on the online copy of the order.

The delivery docket is filed by the storeman in a folder that iskept at the winery.

The invoice is received electronically from the supplier andmatched to the order by the accounts clerk. If the order and theinvoice match the invoice is included in a payments file.

The payments file is approved online by the managementaccountant once a week and used to generate an ABA file which isthen uploaded to the bank by the management accountant.

When the payments file is approved by the management accountant,the invoice is automatically recorded as being paid in theaccounting system.

When services such as repairs are ordered for the winery by thewine production manager, a service order is generated within thecomputer system and automatically sent to the service provider.

When the service has been delivered, the wine production manageror the storeman signs the service delivery docket on the serviceman’s tablet.

The invoice from the service company, with a copy of the signedservice delivery docket, is received online by the accountsclerk.

The accounts clerk checks the signed service delivery docket tothe invoice and the order and adds the invoice to the payments filefor final approval by the management accountant.

In the case of discrepancies, the accounts clerk contacts thesupplier and the wine production manager to resolve the issue.Payments are not made until the issue has been resolved.

Required

Write a report,including a brief executive summary, to your managing partner thataddresses the questions below. Where indicated, use the requiredformat to answer that question.

Question 1A8%
Analyse the ratios and additional information associated with thefour accounts listed by your audit partner, John Richards. Identifythe potential audit risks and any audit steps that need to beundertaken to reduce audit risk.
Answer this question using the following table:

Account	Analysis	Audit Risk	Audit Steps to reducerisk

Question 1B2%
Analyse the ratios and additional information to outline businessrisks that TWC faces.

Question 2A 7%
Identify the internal controls in the system that are potentiallyeffective, the risk that the control could alleviate and one testof control for each of the identified potentially effectivecontrols.
Answer this question using the following headings:

Effective control	Risk alleviated	Test of control

Question 2B 2%
List and justify the weaknesses in internal control for purchasesand accounts payable.

Weakness	Justification

Rationale